Personal Finance

IRS Audits: 4 Famous Red Flags

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RedFlag_Daniel_R_Blume_CCFlickrWe recently reported new data showing that the IRS audits the wealthy more than others. In fact audits of consumers earning between $5 million and $10 million jumped 54 percent last year, according to a report from CNN Money. That said, everyone, regardless of income, is at risk. Even if you file a squeaky clean return, the IRS makes mistakes and comes after the wrong people. It’s happened to me. A couple years ago the IRS claimed I forgot to state thousands of dollars worth of income when it was clearly stated on my return.

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Needless to say, the IRS is vigilant in its quest to find inaccuracies on our tax returns. For those who’ve yet to file (the tax deadline is April 18), here are some line items that tend to come under the microscope more than others.

1. Stated Income

Don’t forget to report any income. State every single penny listed on your W2, 1099 and other income statements. The IRS’ computers track all of our income forms. I usually verify my income statements with year-end pay stubs to make sure the numbers match.

2. Charitable Donations

The IRS examines our charitable contributions closely. It looks to see if our donations are out of the ordinary for other tax payers in a similar tax bracket.  For example, the average charitable contribution for those earning between $50,000 and $100,000 a year is a little more than $2,600, according to the IRS.

[Related: What To Do If You Can't Pay Your Taxes]

3. Auto Mileage

Because tax filers have fudged this itemized expense in the past, it’s now become a red flag for the IRS. As a refresher, if you are searching for a job or self-employed or drove around for a charitable event in 2010, the IRS will generally let you deduct the related auto mileage expense from your taxable income.  But you must keep a record of your trips including the distance your drove, the purpose of the trip and have a receipt from the gas station if possible.

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4. Capital Transactions

Since there’s tremendous room for error or guesswork when reporting capital transactions, the IRS computers scan this portion of your return carefully. If, for example, you sold stocks or a home, it’s up to you to describe the transaction, including what you paid and what you profited or lost.  It’s not like your income from a job where the IRS gets a copy of your W2 or 1099 form. Just like with your mileage deductions, keep accurate records of all capital transactions.

Good luck filing your return. If you’re worried about making the April 18 deadline you can file an extension by filling out form 4868 at IRS.gov. And no, despite the myth, filing an extension does NOT put you at a higher risk of getting audited.

[Resource: Get your free Credit Report Card]

Image: Daniel R. Blume, via Flickr.com

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